Tag: entitlement economy

Ever since India’s 2009 general election, it has become fashionable for many politically-minded people in the country to style themselves as being “right of centre”, “centre-right” and other terms where “right” and something else is joined together with a hyphen.

It is clear what people who label themselves thus are against — the Congress party, and especially the family that constitutes its apex leadership. Mostly, they oppose its “appeasement” of minorities, especially Muslims. They oppose its propensity to create “entitlements” in the form of reservations, quotas, subsidies and special treatment. They oppose the cronyism in the economy and political corruption in governance. They oppose its pusillanimity in foreign policy. There are many more, but these strike me as the big ones.

It is less clear what they stand for. Many of our self-styled right-of-centrists are strident opponents of liberalism. Many have deep misgivings, if not outright opposition to markets and free trade. The most coherent “right” in India is the Hindu right, which is clear about its commitment to Hindu nationalism, broad or narrow. However, even the Hindu right does not have an economic agenda that is consistent with its political ideology: should the Hindu nation rely on individual liberty and free markets, or should it construct a strong state that draws lines on individual freedom and controls the levers of economic power? During and after the 2014 election campaign, market liberals and social illiberals found themselves in the same “right of centre” camp, often having to pretend to be each other in order to fit in.

This ideological confusion and political tension within the segment that calls itself right-of-centre in India comes because our political context and historical development is different from that of the West, where the Right and Left first came into existence. I’ve written about this in my Niti-Mandala post, constructing India’s political spectrum. I was reminded of it last week as I read Jonah Goldberg’s statement of the Conservative position in the United States: which connects tradition and markets and forms the basic worldview of the American Right that the Republicans used to champion before Donald Trump, er, shook things up.

As a Chestertonian at heart, I like and respect old things. I like it when stuff beats the law of averages for reasons we cannot easily fathom. The Hayekian in me thinks old things that last often do so for good reasons we just don’t — and sometimes can’t — know. Unfortunately, we live in an age where we take the razor of reason to every little thing and strain to know the whys of it, as if knowing the why will empower the how. [National Review, emphasis added]

The same argument would be self-contradicting in India: where there are inhuman inequities embedded in caste discrimination and social practices. You can either defend the traditional Indian social order or individual liberty (and markets and so on). You can’t defend both, because the former is constructed without regard to, and often in suppression of the latter. This explains the confusion and tension among our “right of centre” compatriots, who are at best, — to turn a phrase from a best-selling novelist — Half Right. No pun intended.

They can either be traditionalists who seek to defend the old order from social revolution, and therefore come into tension with the Constitution that demands it. Or they can be liberals who pursue individual liberty and free markets, and thereby come into tension with everyone else who opposes either individualism or markets or both. They can’t be both.

Logical consistency apart, the practical question is to what extent can the two Half Right constituencies come together in politics. Is the tension between them bridgeable? Well, that’s hard to say, but the side with greater political clout will force the other into submission. Market liberals are not driving policy in the Modi government today.

The arrangement will hold to the extent that their dislike for the Left outweighs their dislike for each other. If the Congress party sheds its baggage — and that’s a big, big if — or another party takes up its Centrist space, it is likely that the the more liberal of the liberal Half Right will gravitate towards it. Until that time, the liberal Half Right will cohabit with the traditionalist Half Right, because most who seek the security of an ideological label are likely to lack the courage and commitment to stand apart, because that means standing alone.

Why was there ideological collusion in the passage of a bill that promises ‘food security’ but is certain to severely undermine India’s development path? Several reasons can be adduced—from the electoral to the conspiratorial—but what gave both the terrible bill and the even more terrible scheme it seeks to implement the impression of inevitability was the underlying narrative of a “rights-based approach”. And, as Narayan Ramachandran writes, “[the] apostle of the rights-based approach in India is the National Advisory Council (NAC).”

Over the last decade, the NAC’s narrative of a “rights-based approach” to development has acquired dominance. It has pervaded government policy because Sonia Gandhi, its chief and Congress party president, in all likelihood, genuinely believes in it. The power of narratives is such that even if you replace Mrs Gandhi and her NAC with another political leader and his or her own clique, they will be compelled to persist with the same policies as before, or undertake the Hanumanian task of countering the rights-based narrative before rolling back or changing tack on the massive entitlement schemes. (See my previous post on this).

Narayan argues that the rights-based approach is the wrong development model for India. In fact, “rights-based approach” is a misnomer. It is a clever way to refloat the failed policies of socialism under a new, fashionable but dubious political philosophy. In essence, this ‘development model’ identifies an ever-growing list of life’s needs and necessities, declares that they are ‘rights’ and suggests that these be provided by the state.

A lot of well-meaning people are fooled by this sophistry. Since few good people will dispute that people need food, education, healthcare and jobs to live in this world, they become susceptible to the argument that such necessities are rights. Moreover, since a lot of famous people, including Nobel laureates and rock stars, advocate this approach, the notion that such things are rights acquires wings.

Yet for all the celebrity endorsement, warm fuzzy feelings it creates, the so-called rights-based approach is immoral and illiberal. The only true rights are those that do not come at anyone else’s cost. Preetam’s right to life, equality, freedom and property do not come at Palani’s cost, and vice versa. The state might have to incur a cost to protect these rights, but not to provide them. [Meet Preetam and Palani, in Redistribution as Theft]

The entitlements that the NAC-types call ‘rights’ are different. It costs someone something to provide them. If Preetam and Palani are the only two citizens in a hypothetical state, the cost of providing Palani’s right to food, education, healthcare and jobs must be borne by the state. If the state, in this example, is financed by Preetam’s tax payments, Palani’s entitlements come at the cost of further infringing on Preetam’s rights (in this case, the right to use his money as he pleases).

It is sometimes reasonable to argue that Preetam must be made to pay for Palani’s necessities in order to have a equitable society. Or because Palani might be contributing to Preetam’s welfare in other ways. What is wholly wrong, though, is to contend that food, education, healthcare, internet connections, jobs and suchlike are ‘rights’, in the same way as life, freedom and property are rights.

However desirable, however necessary, if it costs (someone else) to provide, it is not a right. It is an entitlement. Liberal democracies can agree to make some entitlements obligations of the state. But it is important to keep these obligations distinct from rights. The framers of the Indian Constitution made this distinction when they separated Fundamental Rights from Directive Principles. Unfortunately, their successors in parliament lacked the same moral clarity, and proceeded to undermine Rights even as they attempted to rightify the obligations that fall under the Directive Principles.

Because it violates (someone else’s) rights, the rights-based approach is universally immoral. India cannot afford the luxury of this ‘international development’ fashion. The cost of providing an ever-growing list of entitlements is prohibitively large, and will severely undermine India’s future. Right-minded people and political parties (no pun intended) should reject the rights-based approach.

Tailpieces:
1. The Two-Person Test to determine what is a right (also known as the Preetam & Palani Test). If it costs Preetam to provide Palani something (and vice versa), then, however desirable it might be, it is not a right.

2. If we accept the rights-based approach, then we urgently need to legislate the “Right to Richer Spouse.” If every citizen has an enforceable right to marry a richer person, then poverty will disappear fairly quickly. Such a right will take away some freedom from the richer persons, but that’s no different from the rights to food, education, jobs and suchlike. If you find the Right to Richer Spouse absurd or repugnant, just remember that it is based on the same logic as the right to food, education, healthcare, jobs, internet connections and so on…

No one really knows how much the Food Security Bill (or Act, if it becomes law) will cost the exchequer. Given the way the legislation is framed, it is impossible to make an accurate assessment of its costs. That doesn’t mean we are short of proponents who argue that it should be (or, worse, normatively must be) affordable. We also have a few opponents who argue that it’s more expensive that what the proponents suggest. We’re talking about numbers whose order of magnitude is in the range of single-digit percentages of GDP.

The scheme is open-ended: there’s no expiry date, no sunset clause. It covers around two-thirds of the population—even those who are not really needy. This means that the outlays will have to increase as the population grows.

Obviously, finding the money to keep this scheme going year after year will be a big problem. There’s worse news though—this programme is over and above other open-ended spending commitments like the NREGA, fuel and fertiliser subsidies which are in the vicinity of 2%-3% of GDP. These are the explicit subsidies. We will not even attempt to calculate the implicit subsidies and opportunity costs in this post.

Many of these schemes work such that the subsidy load will increase when growth slows down. In other words, at such times, subsidies as a fraction of GDP will increase—tightening the government’s budget constraints and reducing its fiscal space.

The nature of these schemes is such that governments will be scared to cut them during times of distress, forget ending them altogether. So how will the Indian government finance the gargantuan entitlement economy and what might be the consequences?

First, through new and higher taxes. This has already happened. Didn’t you notice the ‘education cess’? Didn’t you notice the higher marginal taxes on high income earners? Expect more of the ‘Good Cause Cesses/Surcharges’, a fiscal sleight of hand to raise new taxes by citing a plausible good cause. (See this post on education cess for more). As the economic and fiscal situation gets worse, expect higher tax rates lower down the income pyramid. Corporate profits are also an easy target—so they too will be taxed in increasingly creative and extortionary ways.

The consequence of higher taxes are lower investments and higher tax evasion. Lower investment means lower growth. Higher taxes when you are already in a low growth phase is a recipe to stay in the low growth phase longer than otherwise.

The second way for the government to raise resources is through borrowing. It can borrow money abroad (and incur foreign debt) and borrow money from the domestic market. The former puts the Indian government at the mercy of its foreign lenders to the extent of its borrowings. If you do not recall the days of the 1960s-80s, when India was mired in foreign debt, ask someone who does.

The Indian government can borrow from Indian citizens and corporates through the bond market and other instruments (a new -Vikas Patra can be invented quite easily). While it transfers money into the government’s budget, it crowds out the private sector. Interest rates will rise because of the large government demand for funds, making it harder for entrepreneurs and businesses to raise funds to expand their economic activity. This too puts the brakes on economic growth. Higher interest rates during an economic slowdown will prolong it.

The third way for the government to raise resources is to get the Reserve Bank of India to print more money. This has the effect of increasing inflation and depreciating the value of the rupee vis-a-vis other currencies. Higher inflation makes people poorer. It makes poorer people even more poorer (because they do not own assets like real estate, shares or foreign exchange that can weather inflation). A drop in the value of the rupee will make it tougher to service foreign debt, both for the government and for private firms. If the rise in exports on the account of a cheaper currency does not outpace the higher cost of imports, the current account deficit will grow. It could even result in a balance of payments crisis, like the one seen in 1991.

The fourth way is what is termed an “austerity drive”—for the government to cut expenses. Because politics will not allow cutting back on salaries, pensions, subsidies and entitlements, the government will cut two things: office expenses and capital expenditure. So you’ll probably get to see ministers photographed coming to work on bicycles and civil servants working without air-conditioning. Other than schadenfreude, these measures achieve nothing substantial. Cutting down on capital expenditure—roads, power plants, defence equipment—does create fiscal space, but at the cost of future growth.

Where does this leave us? Well, at the edge of a vicious cycle of low growth, high inflation, low investment, higher unemployment, higher taxes, greater evasion and higher out-migration of talented individuals and firms. We’ve been there before. It’s unconscionable that we are being taken there again.

The only way to avoid this vicious cycle is to suspend entitlements and rekindle growth. It is unlikely that growth can be rekindled without sustained pro-growth measures: greater liberalisation, simpler taxation and coherent economic governance. The Delhi Straitjacket must be dismantled.

It is not often that Indian public discourse seriously discusses big ideas. So it was nice to see, a few days ago, a debate in large sections of the mainstream and social media on economic growth vs redistribution. This debate received wider public attention because it was conflated with a personality clash between Jagdish Bhagwati and Amartya Sen, because it became entangled with the hottest political topic of our times and because it came at a time when the issue itself is important.

When faced with two sharply different points of view, it is common—not least in India—to insist that the truth lies somewhere in the middle. This is celebrated as being reasonable, as representing the compromise that is the hallmark of democratic practice and as being the mystic middle path. So when some economists insist that growth is the best way out of poverty while other champion redistribution of wealth, it is to be expected that there will be reasonable people who will say “we need both more growth and more redistribution”. This is a good way to end the debate amicably and drink to reasonability and democratic compromise.

Unfortunately, there’s a difference between appearing reasonable and being right. “We need more growth and more redistribution” is not a reasonable middle position. It is essentially an argument for redistribution but stated in a different form.

Without growth, redistribution is at best a transfer and at worst, theft. If a community earns the same amount of money (or produces goods of the same value) every year, then redistribution takes from Preetam to pay Palani. If Preetam consents to the arrangement, it is a transfer. If he doesn’t, it is theft. Over a period of time, it will make the community more equal, but it doesn’t necessarily make the community less poor, for even after achieving income equality, the average income can be below what is required to subsist.

Growth is the only way to increase the overall income of a community. It can raise the respective incomes of both Preetam and Palani, although Preetam’s income might rise faster than Palani’s. Inequality will rise in such a community—perhaps because Preetam was born into a better endowed family, perhaps because Preetam works harder or perhaps because Palani faces greater social hurdles—but because both Preetam’s and Palani’s incomes rise, the whole community can climb out of poverty. There is vast empirical evidence for this, and growth is the best antidote to poverty. It’s the most effective anti-poverty scheme known to humankind.

Here’s the best thing: in such a society, there is no inherent need to take from Preetam to pay Palani on the grounds of poverty alleviation. There might be other issues—for instance, progressive taxation to finance public goods based on the ability to pay, but not to help a poor Palani out of poverty.

Hey, wait a minute! Isn’t inequality rising? Isn’t that a bad thing? Aren’t Palani’s prospects not handicapped by historical social hurdles? Aren’t Preetam’s disproportionate gains coming from exploiting Palani? The reasonable people who argue that “we need both more growth and more distribution” usually raise these questions to argue for more redistribution. (There are unreasonable people who raise these questions for other reasons, but let’s stick with responding to the reasonable).

Yes, inequality will rise, especially during periods of high growth. But inequality is a social problem only if it is permanent and ossified. However, growth is the best way to ensure that it is not—with growth comes mobility, and the expectation that one can improve one’s life allows societies to thrive despite the inequalities. Ask migrants to New York or Mumbai. Many also see a moral problem with inequality, but why expect the state to solve moral problems? Let the moral conscience of society address its moral problems.

Shouldn’t we account for historical social hurdles that hobble some citizens? Yes, but these are addressed by creating equality of opportunity, not by insisting on equality of outcomes (where Preetam and Palani end up earning the same income). You can achieve equality of opportunity without redistribution—affirmative action and reservations (without subsidies) are ways to address this challenge.

Isn’t Preetam exploiting Palani? This blog post will not attempt a comprehensive critique of Marxist thought. However, the ideas of economic freedom, property rights, voluntary exchange and comparative advantage together prove that Preetam’s gain is not at Palani’s cost. Although the sort of people who argue that Preetam exploits Palani will seldom acknowledge that redistribution, by definition, means that Palani’s gains come at Preetam’s cost. Unlike redistribution, growth creates non-zero-sum or win-win situations. Only growth creates such situations.

From this alone, we should conclude that “we need growth, not redistribution”. But reasonable people will go to great extents to be reasonable. It’s about sequencing, they’ll say, and contend that some redistribution is necessary for growth. It’s unclear why this is called a reasonable argument—if we accept that both Preetam and Palani will be better off with growth, then the decision to take some from one and give it to the other is unnecessary, whimsical and entirely arbitrary. Instead, why not spend extra effort to ensure that there are no constraints to growth in areas that benefit Palani?

Ergo, what appears reasonable is not quite reasonable: we need growth, not redistribution. The state can ensure growth by getting out of the way of private enterprise, ensuring public goods are provided, acting as an impartial referee, ensuring equality of opportunity and a level playing field. Governments are not good at redistribution: it involves taking money from people who don’t want to give it up and passing it through a system where everyone wants to grab as much as they can get. That is why redistribution is attractive to politicians who are keen to listen to intellectuals who say it is necessary.

The undesirable consequences of using a macroeconomic indicator as a criterion for entitlement.

Earlier this week, the UPA government’s Planning Commission announced that there has been a significant reduction in poverty in India over the last decade—essentially, during the UPA’s two terms in office—from 37.2% in 2004-05 to 21.9% in 2011-12. In other words, while there were 407.1 million poor people in India in 2004-05, the number had come down to 269.3 million by last year. The Planning Commission uses the Tendulkar method (see Rathish Balakrishnan’s explainer on the brief history of poverty lines in India) but it is quite likely that poverty will show a decline regardless of the method adopted to measure it. This is good news.

What was meant to advertise the UPA government’s achievement has actually put it in a spot. How can the UPA government now justify providing deep, open-ended food subsidies to over 822 million people? Does subsidising food for the non-poor, at tremendous cost and contingent liability to the exchequer, have the same justification as delivering essential food to those who absolutely cannot afford it? Not quite. If the Opposition parties mount a political challenge along these lines, it is unlikely that the UPA’s dubious poverty arithmetic will prevail. If.

Let’s consider a broader issue. What is a poverty line good for? Whatever the formula used, a poverty line provides a useful estimate of the level of poverty in a population. How it changes tells us whether public policies are helping or hindering poverty alleviation. The rate of change allows us to compare—albeit in hindsight—which set of policies are more effective in raising incomes. As the Planning Commission’s figures show, poverty declined at an average rate of 0.74% between 1993-94 and 2004-05, and at 2.18% between 2004-05 to 2011-12. This correlates with the higher economic growth rates achieved in the 2000s compared to the 1990s. This is consistent with the empirical observation that economic growth lifts people out of poverty.

What the poverty line is not good for is as a selection tool to identify beneficiaries for entitlements. This is because it is practically impossible to estimate whether a particular person earns more or less than the given poverty line income. This fact is lost on many policymakers and intellectuals—just how does one assess whether a person earns less or more than Rs 33 a day? There are no objective methods to test and verify incomes—no financial records, salary slips, bank accounts and so on. So we are left with self-declaration. However, if people know that those deemed below the poverty line will receive benefits from the government, they are likely to declare themselves poor. To take one example, in 2006, 91% of the families in Karnataka state declared themselves below poverty line.

The Planning Commission can set up expert groups that propose formulas involving automatic exclusion, automatic inclusion and scoring indices. Such methods only create an illusion of accuracy while creating a political economy—read corruption and political patronage—for the procurement of Below Poverty Line (BPL) cards. Note also that once a person acquires a BPL card, she is BPL for life. Such is the bluntness of poverty line-based schemes that they presume that a person, once deemed poor, will remain poor for life. This makes the BPL card even more valuable.

Moreover, for the sake of argument, even if we assume that it is possible to perfectly assess incomes, is it sensible to deny an entitlement to a person earning Rs 34, because the poverty line is set at Rs 33? What about Rs 35? Rs 36? Where do we stop? Any number you pick is arbitrary.

What this means is that while poverty lines are useful as macroeconomic performance indicators, they are useless when used as ‘entitlement lines’. If budgets were infinite, we could live with the leakages and inefficiencies in the knowledge that those who really deserve assistance are not deprived. However, budgets are not infinite, which means that public funds end up in the hands of undeserving people, while there isn’t enough money for essential public goods like education, health, security, roads, electricity and communications. Look at the state of our government schools, hospitals, police stations and roads and ask why they are in such a decrepit condition. It is politically suicidal for any government to cut back on subsidies and entitlements. It is fairly easy, in comparison, to cut down on capital expenditure on public goods.

That’s why misusing the poverty line as an entitlement line is counterproductive—it slows down the rate at which poverty declines.

President Pranab Mukherjee must reject the Union Cabinet’s unjustified ordinance

The UPA government’s Food Security Bill (brief) is likely to cause severe damage to the Indian economy, while saddling future generations with an open-ended spending commitment that will be hard to wind down. The government’s own Commission on Agricultural Costs and Prices and the Expert Committee (report) headed by the chairman of the Prime Minister’s Economic Advisory Council (report) have argued against it. As Ravikiran Rao argues in Pragati, the scheme will not only widen India’s gaping fiscal deficit, but severely distort the national food supply chain.

But you do not have to agree with the bill’s critics to acknowledge that a bill on which there is no consensus even among the government’s top economic experts, which imposes a burden on future generations, at a time when the Indian economy is in doldrums and the investors—domestic and foreign—are wary about investing in India, should not be implemented in a hurry.

Yet that is exactly what the UPA government is attempting to do. After emotional blackmail—for which purpose Nobel laureate Amartya Sen was recruited—failed to persuade parliament in the previous session, the Union Cabinet has now decided to sneak it through an ordinance.

Under the Constitution, an ordinance is an emergency provision, equipping the Executive to implement measures when the Parliament is not in session. The ordinance must be approved by both houses of Parliament the next time they convene and “shall cease to operate at the expiration of six weeks from the reassembly of Parliament”. What is important to note is the debates in the Constituent Assembly, the wording of the Constitution and Supreme Court judgements are clear that issuing ordinances is an emergency provision to be used at extraordinary times. Chief Justice P N Bhagwati, heading a Constitution Bench in D C Wadhwa vs State of Biharheld that

“The power to promulgate an Ordinance is essentially a power to be used to meet an extraordinary situation and it cannot be allowed to be ‘perverted to serve political ends’. It is contrary to all democratic norms that the Executive should have the power to make a law.” [1987 AIR 579, 1987 SCR (1) 798/IndiaKanoon]

The Union Cabinet’s decision to implement the food security bill—that is still in Parliament—through an ordinance flies in the face of the letter and spirit of the Constitution. Justice Bhagwati’s ruling is clear—an ordinance can only be used to meet an extraordinary situation, not perverted to serve political ends.

Where is the extraordinary situation? Where is the food emergency? Is there a famine in the country? Is a famine projected? If there is no extraordinary situation, then the Union Cabinet’s decision to wrap its political pet project in the garb of an emergency is against constitutional morality. It is perhaps unconstitutional as well.

There is no doubt that there many right-thinking Indians who believe that the food security bill is a good thing and that it will even provide food security as intended. However, it will be hard for any reasonable person to conclude that the situation in India is dire enough to bulldoze constitutional and democratic norms and present parliament with a fait accompli.

The argument that the ordinance is necessary because Opposition parties have not allowed Parliament to function does not wash. While the BJP has provided the Congress party with a seemingly plausible excuse, the Union Cabinet is bound by the Constitution. It is sworn to uphold the Constitution. It cannot refuse to perform this duty merely because the Opposition is not playing by the rules. If we are to buy the premise that two wrongs make a right, we are either in a jungle or in a banana republic.

President Pranab Mukherjee is perhaps sympathetic to Sonia Gandhi’s ideological persuasions. As a life-long Congressman, he might be inclined towards the party’s socialist leanings. Yet when the ordinance comes before him, the only question he must ask is “Is there an extraordinary situation that demands this ordinance?” Parliament convenes in a few weeks. Can this not wait until then?

The Indian Republic’s history is replete with presidents, who despite being lifelong Congressmen, have had the integrity, courage and statesmanship to question Congress-led governments. It is up to President Mukherjee to decide whether he wants to be a Fakhruddin Ali Ahmed or a Rajendra Prasad.

…there are economic reforms, astute targeting and restructuring of government

Cash transfers are here. Okay, some cash transfers will be here in some districts for some people early next year, after which the programme will be implemented across the country. No one is in any doubt that this is a pre-election move by the Congress party—it was announced in the party headquarters and not a government office (See Soma Banerjee’s article in Economic Times). It is an election sop. However, unlike loan waivers and the national rural employment guarantee scheme, it is not a bad one. It can even be a good one provided certain important conditions are met.

But first, cash transfers are based on sound economic rationale. They are generally less inefficient than subsidies for goods and services. Also, because they put cash in the hands of the recipients, they are more respectful of individual freedoms and choices. Whether they are also effective in alleviating poverty is another question. Even so, to the extent that they are an improvement over the status quo—by reducing bureaucratic processes, lowering corruption and shortening delays—we should cautiously welcome the introduction of the cash transfer scheme.

There is some debate on why cash transfers work. In the case of conditional cash transfers—where the cash is allocated for specific purposes like education, food, fuel etc—there is debate as to whether it is the conditions that work or the cash. Abhijeet Banerjee and Esther Duflo, economists whose work this blogger respects, believe in the latter: that it’s the cash that makes the impact. (More at TechSangam)

It might sound heretical, but the best scheme might involve ending all subsidies in kind, closing down as many “welfare” ministries and departments, and using the funds to give unconditional cash transfers to the needy. Give the needy cash, respect their individual freedom and just let them spend it as they wish. (See this post for why the old, corrupt political economy of poverty alleviation resists this.)

We are, of course, far from this goal. Only “the benefits of 29 welfare schemes of the government would now be directly transferred to beneficiaries in 51 districts starting January in a pilot programme and then will be extended to 18 states from April.” A total of 42 schemes have been identified for the cash transfer programme. These exclude the big ticket ones—food and fertiliser subsidies—but might include some fuel subsidies. Whether this is intentional, compulsion or both, the impact will be limited. Despite the hoopla in the headlines, it’s not a game-changer. But it can be one, if accompanied by other policy changes.

First, as warned and subsequently noticed in the case of rural employment guarantee, merely putting more cash into the hands of people without doing anything to make the supply competitive will cause prices to rise. Inflation can eat into the higher incomes, especially if they are in the form of cash, undermining the effectiveness of cash transfers. So how does one make supply competitive? By liberalising land, labour and capital regulations. By completing roads, railways, airports. By breaking barriers to inter-state and intra-state commerce. By liberalising education and agriculture. In other words, we need Reforms 2.0 before we can expect cash transfers to have the desired effect. The UPA government’s commitment to the reform agenda is much weaker than its enthusiasm for entitlements and transfers.

Second, it is necessary to target the transfers correctly. In a diverse society where communities are sensitive to relative gains, this is particularly hard. Exercises to identify the recipients, include those who qualify and exclude those who don’t, and to keep this list updated are very expensive, riddled with inefficiencies and fraught with political controversy. With a degree of flippancy, we could argue that making the scheme universal might save a lot of these headaches. Let everyone from Mukeshbhai to the poorest person in the country receive the same cash amount from the government. Let the “inconvenience factor”—for instance, a requirement to physically queue up at a government office every three months to revalidate the cash transfer account—determine who avails of the facility. The Aadhaar UID could then be used as a tracking mechanism rather than a filtering one. We are far from this, and as Bibek Debroy points out on his ET blog, targeting will be a significant problem.

Third, and perhaps the most difficult one, is that the efficiencies realised through a programme like cash transfers must register in terms of lower government expenditure and, all else remaining the same, to lower taxes. This calls for a radical review of subsidies and transfer almost all of them into the cash transfer programme. It calls for the pruning of ministries and departments that currently administer subsidies. Few governments have the stomach for this kind of overhauling of government—the UPA government certainly doesn’t—but to not do this would be to abandon the real payoffs.

Finally, every spending programme must come with a sunset clause. Cash transfers must be reviewed every few years to assess whether they are still required, and automatically lapse if not renewed. Not doing so presumes that policymakers cannot conceive of a time when a substantial number of Indians will no longer be poor. This is defeatism.

So, for cash transfers to work in the national interest, they must be accompanied by broad economic reforms, astute targeting and restructuring the government. From what has been announced by the UPA government, there is little evidence that the scheme only aims for anything more than limited efficiency gains in welfare disbursements. The Congress party evidently believes that this is sufficient to attain its electoral objectives.

Longtime readers might recall that this blog has long argued that India’s crisis of governance arises from the UPA government’s institution of entitlement economics, surrender to competitive intolerance and returns to political violence. Corruption and unaccounted money — issues that have captured popular imagination in the last few months — are merely symptoms of the underlying disease. Ridding the body politic of this malaise requires the building of a political alternative around a new mantra:

Give us back our economic freedom, and let it reverse the entitlement economy of corruption and cronyism.

Give us back our individual liberty, and let it reverse the competitive intolerance that is destroying India’s social capital.

Give us a government that restricts itself to being competent in its basic duties — like ensuring the rule of law –, and let it reverse the tide of violence and the grammar of anarchy.

The old, failed and corrupt political economy of poverty alleviation fights attempts at reform

Jean Dreze, member of the influential, unaccountable and extra-constitutional National Advisory Council, has launched a pre-emptive attack against conditional cash transfers in the pages of today’s Indian Express. It provides an excellent example of how rank paternalism and contempt for the poor Indian’s right to live a free life guides the UPA government’s mindset. This mindset, of course, is covered in the language of “development economics”. In reality it is bad economics and bad for development in addition to being morally repugnant.

Before we look at Mr Dreze’s arguments, let’s look at this conclusion:

The most common argument for cash transfers is that cash makes it possible to satisfy a variety of needs (not just food), and that people are best judges of their own priorities. Fair enough. But if people are best judges of their own interest, why not ask them whether they prefer food or cash? In my limited experience, poor people tend to prefer food, with a gradual shift from food-preference to cash-preference among better-off households…I am more inclined to listen to them than to the learned champions of cash transfers. [IE]

The arrogance in the last sentence must come from sitting close to the Congress party president (another NAC member recently wanted to impose how many dishes could be served at wedding dinners). Mr Dreze, unsurprisingly, does not believe the people are the best judges of their own interests, for he uses the conditional “if”.

Even so, doesn’t he have a point when he says “why not ask them whether they prefer food or cash?” Not quite, because the question is a bit of sophistry. Basic economics will tell you that because cash is most fungible, if you give them cash, the question itself is redundant. If they prefer food they’ll buy food. If they prefer arrack they’ll buy arrack. Neither Jean Dreze nor the National Advisory Council, nor indeed the Government of India has any business dictating what an Indian ought to do with his or her income. Only ‘development economists’ of the dubious sort can think that development is possible when hundreds of millions of adult citizens have the right to vote and procreate but not to decide what to do with their money.

Just because the government gives this money doesn’t mean it can override the individual’s freedom to choose. Neither the government, nor the taxpayer whose money is transferred can deprive the recipient of her freedom.

Let’s consider Mr Dreze’s policy arguments. He first argues that conditional cash transfers won’t work in India (as they did in Latin America) because public services are “missing to a large extent”. This is bizarre, for giving Indians the money to procure services like healthcare and education from private operators allows them to escape having to depend on the government. Just because conditional cash transfers complement public provision in Latin America doesn’t mean they have to do so in India too. There’s no reason—other than socialist ones—why India shouldn’t go in for privately provided, but publicly financed, services. [See this post on the critics of the UID]

Next, he argues that targeting the scheme properly is a problem in India. And in so doing, he expects us to believe that conditional transfers in kind (for instance, food entitlements) can be better targeted than cash. In reality, targeting will remain a problem, not least because of the ‘political economies of development’ which require poverty to remain a problem. A poverty line, even if arbitrarily drawn, helps show the extent of the challenge. But once you target policies around a poverty line you run into all ‘targeting problems’ (see the case of Karnataka’s BPL cards). The entitlement economy also breeds competitive intolerance and political violence.

On these feeble legs Mr Dreze erects his defence of the Public Distribution System (PDS), independent India’s largest and longest running ‘scam’:

First, (food entitlements under PDS) are inflation-proof, unlike cash transfers that can be eroded by local price increases, even if they are indexed to the general price level.

Food entitlements may be “inflation-proof” for the recipient, but not for the government, which still needs to pay for it. It also creates incentives for government to interfere in the pricing of food: from underpaying farmers, to blocking exports, to entering into non-competitive import arrangements. Moreover, Mr Dreze fails to account for the true economic cost of the PDS—procurement, storage, distribution, wastage, pilferage and the associated shadiness that characterises it from bottom to top. Once you see the PDS as mostly inefficient and usually corrupt, you are unlikely to think throwing more money through it is a clever thing to do.

A government that really cares about inflation hurting the poor will be careful about the consequences of its policies. On the other hand, the UPA government listened to Mr Dreze.

Second, food tends to be consumed more wisely and sparingly; cash, on the other hand, can easily be misused.

The contempt for individual freedom apart, there is a practical reason why Mr Dreze is wrong: you can’t save, lend or invest food. Food entitlements will at best lead to hundreds of millions of well-fed, but poor people. To use Atanu Dey’s phrase food entitlements are a pro-poor scheme. They will keep people poor.

Third, food is shared equitably within the family, while cash can easily be cornered by selfish individuals.

Why, hasn’t Mr Dreze heard of families who treat their boy and girl children differently? Can’t food be bartered for arrack or exchanged for cash? Indeed, food or cash, there is nothing to prevent selfish individuals from hurting their families. It is conceit to believe that a government that lacks the competence to deliver drinking water to its citizens can somehow change human behaviour. Social ills need to be addressed, but unless the government is parsimonious in ambitions, outcomes will suffer.

Then again, the irony of disparaging cash is surely lost on Mr Dreze, champion of a scheme to provide, err, cash for work. NREGA is a conditional cash transfer, isn’t it?

Fourth, the PDS network has a much wider reach than the banking system. In remote areas, where the need for social assistance is the greatest, banking facilities are simply not ready for a system of cash transfers (as it is, they are unable to cope with NREGA wage payments).

This is an argument for getting the banking system pervasively into rural areas. Indeed, implementing conditional cash transfers provides banks with an incentive to set up more outlets in rural areas. Liberalising the financial sector to enable greater financial inclusion is necessary in any case, and implementing cash transfers might provide enough of an anchor tenant effect to get it going.

Last but not least, cash transfers are likely to bring in their trail predatory commercial interests and exploitative elements, eager to sell alcohol, branded products, fake insurance policies or other items that would contribute very little to people’s nutrition or well-being.

There is nothing wrong in buying or selling alcohol and branded products. Selling fake insurance policies is illegal. Conflating the two is a manifestation of an ideological prism that abhors free markets and free people. Indians might be poor but they are aspiring for the comforts, fashions and fallacies of modernity. The government has no mandate to prevent his and condemn to have-nots into shall-not-haves.

Mr Dreze’s pre-emptive salvo seeks to defend against the dismantling of the edifice of India’s old, failed and corrupt political economy of poverty alleviation. Ideologues confuse socialism for development. The vested interests that collect rent from the PDS, government hospitals, schools and suchlike are fighting to retain their spoils. Both have little interest in making Indians prosperous.

You’ve heard it in stories. You’ve seen it in plays and movies. The all powerful king is sitting on his throne. A poet, artist or athlete arrives in his court, and impresses the king with his accomplishments. The king then hands out a reward—gold coins, land and sometimes even his daughter—to the man. You might even remember scenes where the king takes off a pearl necklace from around his neck and throws it around that of the grateful subject.

Times have changed. India is a democratic republic. Unlike kings and emperors its political leaders do not rule over us. They are the representatives we appoint to govern our affairs according to laws made with our consent. India’s treasury is not their personal purse to do with as they please. They are the custodians of the taxes we pay to be used for purposes we have pre-approved. Sadly, this is only the theory. In reality the relationship between the government and citizen is more like the one between king and subject rather than between republic and free citizen.

It is precisely this mindset of giving inams that causes our state governments to shower cash prizes and land allocations on the members of world champion cricket team. Let there be no mistake — it is important for governments to publicly recognise and honour excellence in any field. But it must be done so in an appropriate manner. There is no reason why the Indian taxpayer should spend even a paisa rewarding the Indian cricket team for winning the world cup. The tax rupee has many more pressing uses.

Now it can be reasonably argued that the money thus given away does not pinch the exchequer. What’s a few crores in budgets that run into thousands of crores? This view misses the point. These are not the private funds of the politician giving away the money to bask in the afterglow of India’s World Cup victory, but public funds over which the politician is merely a custodian. The legalistic response that these funds come out of the discretionary budget of the chief minister doesn’t wash, because even discretionary spending must be in the public interest to be justified.

It is not that the Republic lacks ways to honour and reward accomplished citizens. There are the Arjuna awards for sportspeople. Why have them if crores are arbitrarily handed to cricketers? Why hand out crores when there are Arjunas?

There are other ways the state can honour sportspeople. There are tens of stadiums in the country named after Jawaharlal Nehru, a great man certainly, but one whose sporting achievements were modest. Why not rename these stadiums after sportspeople who have done the nation proud? It won’t cost more than a coat of paint to paint a new signboard. Bangalore’s Anil Kumble Circle is in the right direction, but why not name new urban landmarks after them (yes, this can be done only after creating new urban infrastructure)?

There is another reason why inams are unacceptable. They perpetuate the medieval mindset of a government that rules and patronises its subjects, rather than a government that governs and respects its citizens. It is the same mindset that robs people of their dignity by patronising them. It is the mindset that robs people of power by doling out entitlements. The entitlement economy aims to make India a nation where goods are free but people are not. As Ramesh Srivats says “Get a free laptop. But not the freedom to say what you want. A free TV, but not the freedom to see what you want.” It bans websites that you should not visit. It bans books that you should not read. It gives you the right to education but insists that you cannot send your children to a nearby school because it doesn’t have a playground.

Far more than any external threat or domestic challenge, it is this mindset that holds India back. If the person handing out the pearls believes he is the ruler, it is implicit that the person taking inam is subordinate and subject, not a free citizen.